This is one of the better analyses on this I've seen, and it addresses something that's been bugging me. If the technology is sufficiently ripe or exciting (whatever technology it might be), then why does the government have to guarantee the loans in the first place? As Mcardle says:
I absolutely agree with that. This is yet another case of the government picking winners and losers in the market place. And it's not even picking winning and losing technologies. It's picking one particular company in a particular market segment.Now, maybe you think that there is some unpriced social return of these investments. But then this has nothing to do with VCs, portfolios, or risk; it's a subsidy. And loan guarantees are not a very good way to structure that subsidy.Here's why: at the company level, there's no difference between an optimal market outcome, and an optimal social outcome (from the DOE's point of view); both investors and society benefit if more solar cells are sold. If the solar cells are unlikely to be sold to many people, than the loan guarantee is not a good idea--it will not foster much environmental benefit. If the solar cells are likely to be sold to many people, than the loan guarantee should not be needed; private investors should be easily found to back the manufacturing.
If the government wants to subsidize a particular technology, there are other ways it can do (and has done) that. Think about energy efficient appliance credits, and the like. In those cases, the government is not picking a company, it's picking a technology or desired outcome. Efficiency standards were developed (whether or not you agree with them is another story; at least it was a relatively level playing field) and any company could manufacture a product that complied with those standards. Then, the consumer was allowed to choose (wow, that sounds suspiciously close to free-market principles) if they want to purchase a compliant product, and if so, from whom. Now, it's possible that the government tax subsidies would play a role in that decision-making process. Certainly, the companies hope it will, as much time as they spend advertising that particular benefit. But, it's also possible that other factors like 1) Will it fit in my laundry room? or 2) Can I afford the purchase price RIGHT NOW? or 3) Do I like its form and function? might be bigger drivers in the decision. Either way, the consumer gets to choose, and the government is merely trying to influence the decision through its legitimate taxing authority.
In the case of Solyndra and the other loan guarantee recipients, there is no element of free-market control in the process. The government is straight-up picking winners and losers, and losing out in the end when business plans the open market wouldn't touch with a 100-foot pole crash and burn.
Further, I think loan guarantees inject a measure of moral hazard into the process. Once the government has loaned money in the first place, it behooves it to continue to prop up that business. Also, the government is not receiving any sort of equity stake like a traditional VC would, so therefore has no control over what the company does with the money. It's almost like the government is more in a position of being the reinsurer, and on the hook for any losses.
I'll be honest. There is one place that I can think of where a loan guarantee process might make sense, and it's in terms of what Obama pitched as his "Infrastructure Bank". These are not revenue projects. They will make money for the construction firms and that's about it. Further, these are then essentially government to government loans, so Washington isn't really competing in, and mucking up, the market. However, there are also some huge issues with an Infrastructure Bank, and I'm still up in the air as to whether or not it's a good idea long-term.
However, loan guarantees to private companies because they put together a really cool presentation deck? Yeah, that needs to stop, yesterday.